Tuesday, May 12, 2015

Maryland's New False Claims Act

Last month, the Maryland General
Assembly passed a long-overdue measure to strengthen the state’s
False Claims Act. Maryland’s old version of the False Claims Act
was limited to frauds against the state’s medical care programs.
Past efforts to expand the law had failed, largely because of
opposition from the state’s high-tech and research institutions.

When SB 374 takes effect, those who
commit frauds against the State of Maryland will become liable for
three times the amount they defrauded from the state, and up to an
additional $10,000 for each fraud. This later provision will be
particularly significant for ongoing schemes of fraud that involve
repeating the same type of claim over and over again. Even if a small
amount is at stake in each claim, the extra penalty can pile up.

Section 8-102(a), however, exempts
from liability those who commit a fraud “related to state or local
taxes.” Apparently, Maryland’s General Assembly seeks to curry
favor with taxpayers by protecting them from this additional
liability if they choose to commit a fraud against the state.

One of the big advantages for states
in enacting their own False Claims Acts comes from a 2006 provision
inserted into the federal False Claims Act by Sen. Charles Grassley
(R-Iowa). This “Grassley Amendment” increases the state’s share
of funds recovered under the federal False Claims Act by ten percent
(10%), but only if the state has its own law that meets the minimum
standards of the federal law. A state’s potential recovery under
the Grassley Amendment can be millions or billions of dollars,
depending on the federal government’s success in its own cases.
About half of the states have qualified for this benefit.

However, it appears that
Maryland’s new law still falls short of the requirements for the
Grassley Amendment. The Inspector General of the Department of Health
and Human Services published its requirements for qualifying for the
Grassley Amendment. At 71 Fed. Reg. 48554 (published August 21,
2006), the HHS OIG listed among the requirements that, “If the
State elects not to proceed with the action, the relator may
conduct the action[.]”

Maryland’s SB 374, at Section
8-104(A)(7) and (B)(3)(II)(2), provides that if the state declines or
withdraws from the action, then “the court shall dismiss the
action.” This is the opposite of what the Grassley Amendment
requires. It also limits the application of Maryland’s law to only
those cases that the state Attorney General decides to pursue. Many
frauds against the federal government have been proven by
whistleblowers in cases they chose to pursue without any help from
the government, and Maryland is going to lose the revenue that could
flow from such cases. Maryland also stands to lose the millions of
federal dollars that it could otherwise receive through the Grassley
Amendment.

On the plus side, SB 374 creates a
new protection from retaliation. Employees and contractors are
protected when they investigate, initiate, testify in, or assist a
lawful action against a fraud. Section 8-107(A). They are protected
when they disclose a fraud to a supervisor or the government. They
are also protected when they refuse to engage in a fraud against the
state. This provision parallels a federal statute that provides the
same protection for those opposing frauds involving federal funds. 31
U.S.C. § 3730(h).

Victims of retaliation may seek an
injunction to stop the retaliation. They may get double their back
pay and punitive damages. The law provides a statute of limitations
of at least three years. Section 8-108(A).

Other shortcomings of SB 374 are that
it omits a provision allowing the state to recover through
alternative means. So, if a whistleblower files a lawsuit and the
state decides to make a recovery through a related criminal case, for
example, the whistleblower could get nothing.

If the whistleblower participated in
the fraud, SB 374 permits a court to reduce the whistleblower’s
award. Section 8-105(B). If the whistleblower is convicted of any
crime in connection with the violation or the fraud claim, then the
law bars the whistleblower from receiving any award, and requires
that any award already paid be returned. These provisions fail to
appreciate that it often takes a crook to catch a crook, and we want
especially to encourage crooks themselves to report the frauds they
know so well.

Section 8-105(C) permits a court to
order a whistleblower to pay the defendant’s attorney’s fees if
the court finds that the action was brought in bad faith. Unless the
courts set a high standard for a showing of bad faith, then this
provision could become a serious deterrent for whistleblowers
considering whether to disclose a fraud through this law.

The law exempts elected officials
from liability if they can show that the government knew about the
fraud. Section 8-106(A). The law severely limits claims made by
public employees who would know about the fraud through the
performance of their duties. Section 8-106(B). This provision fails
to recognize the role public employees can play in cases where their
supervisors decide to let a fraudster get away with the fraud.

The law does not permit the state to
recognize a whistleblower’s contributions once a public disclosure
is made. Section 8-106(D). Finally, SB 374 prohibits any retroactive
effect – allowing fraudsters to breath freer if they complete their
frauds before the law’s effective date.

Maryland Attorney General Brian Frosh
pushed for passage of this law, saying it is an important
fraud-fighting tool that will recoup millions for the state budget.
“The False Claims Act is a proven tool and I am confident it will
recoup millions for the state, while creating a level playing field
allowing honest businesses to thrive,” Attorney General Frosh said
in a press release. “It has been effective for the federal
government. It has been effective in states all over the country. And
it is going to work in Maryland.”

Frosh
reported
that the state has recovered nearly $62 million over the past four
years from Medicaid-related cases initiated by whistleblowers and
others. The federal government recouped $5.6 billion in the 2014
fiscal year from its version of the False Claims Act, with $3.1
billion coming from cases involving banks and financial institutions.

Strangely,
the Department of Legislative Services issued a Fiscal Note that
looked only at the costs for the state in pursuing fraud cases. It
estimates that the annual cost would be over $500,000, but makes no estimate
of the potential or likely recovery for the state. The Department of
Legislative Services made a similar overestimate of costs to the
state for the Civil Rights Tax Fairness Act that passed in 2013.

Maryland’s False Claims Act passed
the Maryland House of Delegates by a vote of 88-51. It is now waiting
for the signature of Gov. Larry Hogan. Thereafter, the Maryland
General Assembly would do well to revisit the False Claims Act and
have it conform fully to the Model State False Claims Act published
by Taxpayers Against Fraud.